Capital allowances

If you have invested in a new commercial building or carried out significant renovation work, you may have overlooked a valuable capital allowance. The Structures and Buildings Allowance (SBA) provides tax relief on qualifying capital expenditure incurred on certain new non-residential structures and buildings.

The SBA applies to qualifying costs incurred when constructing, purchasing or renovating qualifying commercial structures. This can include expenditure on design fees, site preparation, construction works, renovation, conversion and fitting-out costs.

The allowance was introduced in October 2018 at a rate of 2% per year on a straight-line basis. From April 2020, the annual allowance rate increased to 3%, with relief available over a period of 33 and one third years. This rate continues to apply for qualifying expenditure.

To qualify, the structure or building must be used for a qualifying business activity, such as a trade, profession, property business (excluding residential property), or certain other commercial activities. The structure must also meet specific conditions, including having an allowance statement to support the claim.

Claims are made through your tax return, and the relief can generally continue for the full allowance period where the qualifying conditions continue to be met. If you have constructed, purchased or renovated a commercial property since October 2018, it is worth reviewing whether you are claiming all the capital allowances available to you.

The Annual Investment Allowance (AIA) is a valuable tax relief that allows businesses to deduct the full cost of qualifying plant and machinery from their taxable profits. This means that, instead of claiming relief over several years, businesses can often obtain 100% tax relief upfront.

The AIA is currently capped at £1 million per year, and a fresh allowance is available for each accounting period (adjusted if the period is shorter or longer than 12 months).

Most plant and machinery qualifies, including items such as tools, machinery, vans, office equipment, computers and certain building fixtures. However, AIA cannot be claimed on cars, assets previously owned for non-business use or items given to the business.

AIA is available to sole traders, partnerships and companies. However, it is only available to partnerships where all partners are individuals, mixed partnerships that include companies do not qualify.

Timing is important. You can only claim AIA in the period the expenditure is incurred. This is usually the date the contract is signed if payment is due within four months, or the date payment becomes due if later. Special rules apply for hire purchase.

If you do not want to claim the full amount you can claim part of the cost and carry forward the balance using writing down allowances.

Used correctly, AIA can significantly reduce a business’s tax bill, particularly where there is substantial investment in equipment.

The Annual Investment Allowance (AIA) is a generous tax relief that allows for the total amount of qualifying expenditure on plant and machinery to be deducted from pre-tax profits. The maximum amount that can be claimed for the AIA is limited to a £1 million annual cap on qualifying purchases.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to business cars, items you owned for another reason before you started using them in your business or items given to you or your business.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed, if payment is due within 4 months of the contract being signed. If not, the actual payment date if it is due more than 4 months later.

The new 40% First Year Allowance (FYA) for qualifying main-rate plant and machinery expenditure first announced at Autumn Budget 2025 has now come into force.

Effective from 1 January 2026, the new FYA applies to qualifying main-rate plant and machinery expenditure. It was also announced at the recent Autumn Budget 2025 that the main rate writing down allowances would be reduced to 14% (from 18%) from 1 April 2026 for Corporation Tax purposes and from 6 April 2026 for Income Tax purposes.

These changes mean that:

• Businesses can claim a 40% FYA on qualifying main-rate plant and machinery.
• The allowance applies to assets acquired for leasing, which did not qualify from full expensing.
• Unincorporated businesses, including sole traders and partnerships can also benefit from the FYA. These businesses did not benefit from full expensing.
• The allowance is permanent, providing long-term certainty for investment and capital planning.

The new FYA complements the existing full expensing regime, which remains in place for incorporated businesses. Full expensing allows companies to deduct 100% of the cost of qualifying plant and machinery from taxable profits in the year of acquisition, delivering tax savings of up to 25p for every £1 invested, in line with the current Corporation Tax rate.

Understanding how the new 40% FYA interacts with existing allowances, including full expensing and annual investment allowances, will be important when considering expenditure going forward.

Writing-down allowances (WDAs) are a type of capital allowance that let you deduct a percentage of an asset’s value from your taxable profits each year. In some cases, you may be able to claim more relief using other capital allowances, such as the Annual Investment Allowance or first-year allowances.

There are two rates of WDA for plant and machinery. To calculate them, you first group your expenditure into separate pools:

• the main pool – this includes expenditure on most items – the rate is 18%; and
• the special rate pool includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars – the rate is 6%.

Assets are grouped into pools, and WDAs are applied to the balance of each pool after adding new purchases, deducting disposal and accounting for any private use.

The Small Pools Allowance provides an alternative to WDAs. If the balance in the main or special rate pool is £1,000 or less, you can claim the entire amount in one year rather than applying the WDA percentage. The Small Pools Allowance cannot be used for single-asset pools and is prorated for accounting periods shorter or longer than 12 months. You can choose between claiming WDAs or the Small Pools Allowance, where possible, but cannot claim both.

An extension of First-Year Allowances (FYA) for zero-emission cars and charge points was announced as part of the recent Budget measures.

This means that the 100% FYA for qualifying expenditure on zero-emission cars, and electric vehicle (EV) charge points will now be available until 31 March 2027 for Corporation Tax purposes, and until 5 April 2027 for Income Tax purposes. This one-year extension to the current reliefs means that eligible businesses can continue to deduct 100% of the cost of these assets from their taxable profits in the year the expenditure is incurred until the relief expires.

The FYA for cars was introduced from 17 April 2002 for low CO₂-emission vehicles, including electric cars, and was then restricted to zero-emission cars from April 2021. The FYA for electric vehicle charge points was introduced in November 2016. Both of these allowances are intended to support the UK’s move towards cleaner vehicles.

According to HMRC’s figures, this measure is expected to benefit around 13,000 incorporated businesses and 6,000 unincorporated businesses by continuing to offer 100% tax relief in the year the expenditure is incurred for qualifying expenditure on zero-emission cars and EV charge points.

Enterprise zones were first launched in 2011 and are specific geographic areas that provide various tax breaks and government support. Businesses that set-up in enterprise zones can benefit from up to 100% first year capital allowances for qualifying investments in plant and machinery.

This benefit was expected to have ended on 31 March 2020. However, the government announced at Spring Budget 2020, that these capital allowances will remain available for expenditure incurred in relation to all areas, whenever designated, until at least 31 March 2021.

The enterprise zone must also be located within an Assisted Area which is specified within Section 1 Industrial Development Act 1982 or Northern Ireland. The qualifying expenditure must be incurred within a period of 8 years beginning with the date the specific area is treated as having been designated.

The government has confirmed that the period for which the 100% first year allowances (FYAs) are available is to be extended from April 2021 to April 2025. In tandem with this announcement, there is also a significant reduction in the CO2 emission thresholds which are used to determine the rate of capital allowances available for business cars.

This means that the 100% writing down allowance (WDA) will only be retained for zero emission vehicles (ZEVs). The threshold will be reduced from 50g/km to 0g/km. The measure is designed to incentivise the uptake of zero CO2 emission vehicles. The main rate WDA of 18% will apply to other cars with emissions up to 50g/km (was up to 110g/km). The special rate WDA of 6% will apply to higher polluting cars with emissions above 50g/km.

The FYA allows companies to set the full cost of qualifying cars against their tax bills in the year the cars were purchased. The FYA is only available on the purchase of new cars, second-hand cars do not qualify for FYAs (but can claim WDAs). If claiming the full amount of FYA would create a loss, it is also possible to claim less than the full 100% FYA and claim the balance using writing down allowances.

The Structures and Buildings Allowances (SBA) facilitates tax relief on qualifying capital expenditure on new non-residential structures and buildings. The relief applies to the qualifying costs of building and renovating commercial structures.

The relief was introduced with effect from 29 October 2018, at an annual rate of 2% on a straight-line basis (over 50 years). As part of the Budget measures, the Chancellor has announced an increase in the annual allowance to 3% from 1 April 2020, for businesses within the charge to corporation tax and from 6 April 2020, for businesses within the charge to income tax. This new relief will provide businesses with over £1 billion in additional relief by the end of 2024-25.

The increased rate of relief will help further support business investment in constructing new non-residential structures and buildings including necessary preparatory costs, and the improvement of existing ones. The announcement will also help improve the international competitiveness of the UK’s capital allowances system.

Businesses whose chargeable period spans 1 April (corporation tax) or 6 April (income tax), may claim 2% per year for days in that period before the operative date and 3% for days thereafter. No relief is available where parts of the structure qualify for other allowances, such as Plant & Machinery allowances.

Businesses can claim a 100% first-year allowance (FYA) on the purchase of certain qualifying Plant and Machinery (P&M). The cash-flow benefit of accelerated tax relief is designed to encourage businesses to invest in capital items which help reduce their carbon footprint by being energy and water efficient. The list of qualifying items includes expenditure on new unused electric vehicles and other cars within the 50g/km threshold for low CO2 emissions.

The list also includes:

• energy saving equipment that’s on the energy technology product list, for example certain motors
• water saving equipment that’s on the water efficient technologies product list, for example meters, efficient toilets and taps
• plant and machinery for gas refuelling stations, for example storage tanks, pumps
• gas, biogas and hydrogen refuelling equipment
• new zero-emission goods vehicles

The use of the FYA allows companies to set the full cost of qualifying P&M against their tax bills in the year of purchase. The FYA is only available on the purchase of new qualifying cars, second-hand cars do not qualify for FYAs (but writing down allowances can be claimed).

If claiming the full amount of FYA would create a loss, it is also possible to claim less than the full 100% FYA and claim the balance using writing down allowances.

Obviously there are a range of non-tax issues that need to be considered if you are advising clients on these issues, prior to investing in new equipment or vehicles. Hopefully, this post will clarify one raft of tax allowances that you could consider.